The country of Zanabar produces computers and produces them in a large quantity while the country of Abathana expertly produces cell phones in large quantities. In order for both countries to consume more desirable combinations of goods and services (computers and cell phones) they should:

a. allow only Abathana to trade a small quantity of cell phones for computers since cell phones are worth more.
b. trade until each country has exactly equal number of cell phones and computers which will then create efficiency.
c. freely trade computers and cell phones to meet improve allocative efficiency.

c. freely trade computers and cell phones to meet/improve allocative efficiency

Explanation:

Allocative efficiency is the output level at which the marginal cost is equal to the price i.e. the price that consumers are willing to pay is equal to the marginal utility that they get.  Marginal cost is the change in cost when an additional output is produced.

When suppliers withhold production, marginal cost is likely to be lower than the marginal utility. As output increases, marginal cost increases, marginal utility decreases and price falls to meet the equilibrium where the marginal utility is equal to marginal cost. The society benefits by being able to enjoy more of the good or service, in this case, both computers as well as mobile phones. Hence, each country should trade freely after producing their product of expertise and share it with the other country so it can benefit as well.

Refer Diagram

At Q1, it is allocatively inefficient of P3 - P1. However, as output increases to Q2, MU is equal to MC and price is P2, proving to be allocatively efficient

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